NOVA’s FY24 results disappointed. Its FY24 core net profit declined 25% on reduced sales and lower-than-expected margin. However, we remain upbeat on its prospects driven by higher production at its new plant and the recovery in consumer spending. We cut our FY25F net profit forecasts by 24%, reduce our TP by 10% to RM0.63 (from RM0.70) but reiterate our OUTPERFORM call.

Its FY24 core net profit of RM9.3m missed our forecast by 26%. The variance against our forecast came largely from weaker-than-expected sales, we believe, as consumers temporarily held back purchases on weak spending sentiment and lower-than-expected margin. Consensus estimate is unavailable. No dividend was declared as expected. However, we expect a final DPS of 3.0 sen to be delcared in 4QCY24. Note that in FY23, a final dividend was declared in 4QCY24.

YoY, its FY24 revenue fell 10%, we believe, as consumers held back purchases. Its core net profit declined by a sharper 23%, we believe, hit by: (i) higher operating cost including raw matrial and further excerbated by less than optimum operaing scale leading to poor cost absorption, and (ii) higher tax rate on the depletion of deferred tax assets.

QoQ, its 4QFY24 top line was flattish while core net profit fell 24% due to: (i) we believe, cost pressure, and (ii) a higher tax rate on the depletion of deferred tax assets.

Outlook. We expect consumer sentiment to gradually improve during the year as and when more clarity emerges over subsidy rationalisation, especially in relation to RON95. Once put in place, consumers will gradually “come to terms” with it and resume spending in accordance with their financial ability. A 13% hike in the salary of civil servants from Dec 2024 and a gradual pick-up in the local economy and job market in- line with the recovery in the global economy will also help.

Meanwhile, NOVA is ramping up production at its new plant during the year. There is also earnings impact from the introduction of 15-20 new SKUs in FY23 (in addition to 35 in FY22) including skincare products, health supplements, and Activmax and Sustinex range of functional food products such as plant-based protein including specialty Activmax for hospitals.

Forecasts. We cut our FY25F net profit by 24% and introduce FY26F numbers.

Valuations. Consequently, we reduce our TP by 10% to RM0.63 (from RM0.70) based on 15x FY25F EPS, is in line with its peers’ average. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 2).

Investment case. We continue to like NOVA for its: (i) integrated business model which encompasses the entire spectrum of pharmaceutical value chain from product conceptualization, R&D to manufacturing and sales, (ii) superior margins due to its original business manufacturing (OBM) business model, and (iii) earnings growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals. Maintain OUTPERFORM.

Risks to our call include: (i) intense competition from existing/new and local/foreign players, and (iii) product safety and regulatory risks.

Source: Kenanga Research - 3 Sep 2024